Saudi Arabia woos Asia with 20-mth low crude OSPs

Top oil exporter Saudi Arabia will keep enticing Asian term buyers to the kingdom’s crude by maintaining official selling prices (OSPs) near the levels set for September, the lowest in as long as 20 months, responding to a market awash with OPEC supplies.

The cut in the Arab Light OSP was in line with traders’ forecasts, but the reductions for medium and heavy grades were deeper than expected, emphasising the weak sentiment for the Middle East physical crude market.

A Reuters poll of refiners and traders had correctly predicted Saudi Arabia would cut all its prices for crude heading to Asia due to the steep contango in Dubai prices and sluggish regional demand, especially after recent port and refinery accidents in China and Taiwan.

“Saudi Arabia is under some pressure that term buyers are not willing to take full volumes,” said a trader with a Northeast Asian refiner on Thursday.

“The Saudis could keep OSPs steady at low levels in the near future,” he added.

Saudi Arabia restored full contractual volumes of crude to the majority of Asian buyers since January after cutting supplies for most of 2009 to bring output in line with Organization of the Petroleum Exporting Countries (OPEC) quotas.

“There are no serious cuts in OPEC allocations over the past few months and the demand of many refineries can be met by term crudes,” a second trader said, adding that explosions at China’s Dalian port and Taiwan’s Formosa refinery in July also curbed spot demand.

OPEC met only half its promised cuts in oil supply last month, a Reuters survey showed last week, the lowest since current supply targets were adopted in December 2008.

OPEC will next meet on Oct. 14 to decide on production policy.

“OPEC compliance right now is very bad,” said a trader with a western trading firm. “Especially with flat prices so high, and with little end-user demand, I guess the Saudis are realistic. I think they are worried about the relative attractiveness of their crude against the value of Oman cargoes, which has cratered.”

The value of October Oman has fallen to deep discounts of $1.50-$1.60 to Dubai quotes.

“Low OSPs mean that everyone will maximise the non-tradeable volumes and that the spot tradeable grades will suffer,” said another trader with a western trading firm.

COMPETITION INCREASES

The growing popularity of Russian ESPO Blend crude among Asian refiners may have also prompted the OSP cuts, traders said.

“They are fighting with ESPO to win market share,” said a fourth trader.

However, weaker prices and the approach of strong seasonal winter demand could shore up demand for October-loading cargoes which will start trading next week, traders said.

State oil giant Saudi Aramco has cut the price of Arab Light to Asian buyers by 50 cents a barrel to 65 cents below Oman/Dubai average for September, and cut the price of Arab Medium crude by 40 cents a barrel to a $2.15 discount, both the lowest since January 2009.

It also reduced the price of Arab Heavy for September to Asia to a 19-month low of $3.40-discount to Oman/Dubai average.

The cuts will trigger similar falls in prices of Iranian, Iraqi and Kuwaiti crudes, affecting some 7 million barrels per day (bpd) of crude bound for Asia.